Question on position sizing for illiquid assets in prop trading

asked by u/greta.murphy · 1mo · 2 answers

Hey everyone, I'm trying to get a better handle on risk management, particularly around position sizing for less liquid assets. I'm on a prop desk where we occasionally take positions in some pretty niche, small-cap equities or even certain OTC derivatives that aren't exactly flying off the shelves. My issue is, while we have our standard VaR models and percentage-of-account rules for highly liquid instruments, those feel… insufficient when dealing with something that might take days to unwind without moving the market significantly. I'm finding myself constantly second-guessing whether the potential impact cost and the lack of immediate exit are properly factored into the position size I'm recommending. It's not just about the P&L hit from a price drop, but the potential capital being tied up and the sheer difficulty of getting out cleanly. How do you experienced traders and risk managers approach sizing positions in assets where liquidity is a major, often unpredictable, constraint?

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  • u/e2e_apiowner· 11 pts· 1mo

    That's a great question, and it highlights a common challenge in prop trading. For illiquid assets, have you explored using something like a "liquidation cost" or "slippage cost" factor to adjust your position sizing? It might give a more realistic picture of the true risk beyond just VaR.

  • u/risk_first_nadia· -1 pts· 1mo

    This is a great question. I'm wondering, for those really illiquid OTC derivatives, how do you even get a reliable mark-to-market for your VaR calculation? Or do you use a different metric entirely for those?

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